Free banking in Second Life

Yes, economic activity in Second Life continues to rise.  I am interested in the Second Life currency, Linden Dollars, which trades against the U.S. dollar at a market-determined exchange rate.

Free banking economists used to debate whether a private sector fiat currency could succeed.  Hayek, in his Denationalisation of Money, said yes but most other people said no.  The obvious problem is time inconsistency, namely that the fiat currency issuer will at some point inflate away its value to the seigniorage-maximizing margin, noting that such a margin changes with the passage of time and not necessarily in a favorable direction.

Who would have foreseen that maximizing income from "land" sales might check this outcome?  I think of Linden Dollars as akin to legal tender currencies: you can’t buy anything in Second Life without them.  Since the goods and services in Second Life have value the currency does too.

Who had expected that the next generation of private currency suppliers would make it work by, in God-like fashion, supplying accompanying worlds as well?  What other problems can be solved this way?  Or are Linden Dollars the next bubble waiting to burst?


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